SDE (Seller's Discretionary Earnings)
SDE (Seller's Discretionary Earnings) SDE is a financial metric that represents the total financial benefit a single owner-operator receives from running a business.
It provides a comprehensive view of a business's true earning potential by adding back owner-specific expenses and discretionary costs.
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How SDE Works
Seller's Discretionary Earnings (SDE) is a crucial valuation metric for small businesses, typically those with revenues under $10 million. Unlike EBITDA, SDE accounts for the unique financial characteristics of owner-operated businesses by adding back various owner-specific expenses.
The calculation of SDE starts with net income and includes add-backs such as owner's salary, personal expenses, one-time costs, and above-market compensation for family members. This approach provides a more accurate representation of the business's true earning potential from a potential buyer's perspective.
SDE is particularly important in the lower middle market, where businesses are often deeply dependent on the owner's involvement and personal financial management.
Key Points
- •Includes add-backs like owner's salary, personal expenses, and one-time costs
- •Provides a more comprehensive view of business earnings than traditional profit metrics
- •Critical for businesses under $10 million in revenue
- •Helps determine business valuation more accurately
- •Highlights the financial benefits of owner-operator businesses
Frequently Asked Questions
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